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Fed keeps 'patient' on rate hike amid 'solid' growth

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The Federal Reserve on Wednesday said it would remain "patient" on raising ultra-low interest rates as the economy posts "solid" growth.

PHOTO: BLOOMBERG

[WASHINGTON] The Federal Reserve on Wednesday said it would remain "patient" on raising ultra-low interest rates as the economy posts "solid" growth.

Wrapping up a two-day monetary policy meeting, the Federal Open Market Committee, as expected, left unchanged the key federal funds rate near zero, where it has been pegged since late 2008.

"Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy," the Fed's policy arm said in a statement.

The FOMC said that in the six weeks since its December meeting, data and other information suggests "economic activity has been expanding at a solid pace." The FOMC had inserted the "patient" language in its December statement, and the new statement upgraded the central bank's previous view of a "moderate pace" of growth in the economy .

"If anyone thought that the Fed was preparing to join its overseas counterparts by delaying presumed rate hikes until later this year or even next year, today's FOMC policy statement is a resounding declaration that the Fed has no such intentions," said Paul Edelstein, director of financial economics at IHS Global Insight.

"The committee, in fact, was downright bullish on current economic conditions and the outlook." The FOMC saw further improved US labor market conditions, with "strong job gains and a lower unemployment rate," and said slack in the market "continues to diminish." The world's largest economy produced a robust five percent expansion in the 2014 third quarter, and for all of 2014 had the strongest job growth in 15 years, pulling the unemployment rate down to 5.6 per cent in December.

The Fed officials noted a moderate rise in household spending that accounts for about 70 per cent of the economy's activity, boosted by recent declines in energy prices, and an increase in business fixed investment.

Inflation dropped further below the Fed's 2.0 per cent longer-run target, "largely reflecting declines in energy prices," and was expected to decline further in the near term, the FOMC said.

The personal consumption expenditures price index, the Fed's preferred measure, put inflation at an annual rate of 1.2 per cent.

It said market-based measures of inflation expectations "have declined substantially in recent months," stronger than its previous description that they had fallen "somewhat further".

But longer-term inflation expectations have remained stable, the FOMC said. "The Committee expects inflation to rise gradually toward 2 per cent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate."

"The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced," the policy makers said in the statement, which was unanimously approved. In December there were three dissenters.

"The combination of an upgrade to the growth story and acknowledgement of the inflation impact of cheaper oil allowed last month's dissenters to vote for the statement, which is essentially a holding operation," said Ian Shepherdson of Pantheon Macroeconomics.

"The statement leaves the door open to the first hike in June, if the labor data continue on their current path," Shepherdson said.

The Fed policy makers said they would take into account a wide range of information in deciding when to raise the fed rate from a range between zero and 0.25 per cent, aimed at supporting the economy's recovery from the Great Recession that ended in 2009.

They said they were watching measures of labour market conditions, inflation pressures and inflation expectations, and financial and international developments, adding "international" to the list.

The minutes of the December FOMC meeting revealed several officials expressed concern about the potential negative impact on the US economy from the global slowdown.